Presentation at the HLEG thematic workshop on Measuring Inequalities of Income and Wealth, 15-16 September 2015, Berlin, Germany, http://oe.cd/hleg-workshop-inequalities-income-and-wealth

1. 1/35
THE ROLE OF CAPITAL INCOME FOR TOP
INCOME SHARES IN GERMANY
Charlotte Bartels (DIW/SOEP)
Katharina Jenderny (Umeå University)
OECD – September 15th, 2015

2. 2/35
U-countries according to Piketty (2014)
0
5
10
15
20
25
Incomeshare(%)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
United States United Kingdom Canada Australia
Income share of top 1%
Source: World Top Incomes Database

3. 3/35
L-countries according to Piketty (2014)
0
5
10
15
20
25
Incomeshare(%)
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Germany Sweden Japan
Income share of top 1%
Source: World Top Incomes Database, Germany 2001-2010 from Piketty (2014)

4. 4/35
Germany
0
5
10
15
20
25
Incomeshare(%)
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Prussia Interwar Germany BRD Reunified Germany
Income share of top 1%
Source: Own calculations based on uncorrected tax statistics

5. 4/35
Germany
0
5
10
15
20
25
Incomeshare(%)
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Prussia Interwar Germany BRD Reunified Germany
Income share of top 1%
Source: Own calculations based on uncorrected tax statistics

6. 5/35
Estimation of top income shares
The share of income accruing to the top x% is computed
using personal income tax (PIT) statistics
and external population and income aggregates
Income concept: taxable income
Problem: tax reforms often change the definition of
taxable income
Challenge: make series comparable over time and across
countries

7. 6/35
Trend towards dual income taxation
Lower and proportional tax rates on capital income to
reduce tax compliance and collection costs
Dual income taxation spread from Nordic countries to
other European countries since the early 1990s:
Denmark 1987, Sweden 1991, Norway 1992, Finland,
1993, Belgium 1993, Austria 1994, Italy 1999 and many
other European countries
Dual income taxation poses a problem if data from the
withholding tax on capital income cannot be linked to
PIT
⇒ this applies for Germany since 2009

8. 7/35
Capital income concentrated at the top
0
10
20
30
40
50
60
70
80
90
100
Shareoftotalincome(%)
<P90
P90-95
P95-99
P99-99.5
P99.5-99.9
P99.9-99.99
Top
0.01
Business Wages Capital
2001
Source: Own calculations, microdata

9. 8/35
Reassessing and Extending the German Series
1. We produce a series with a consistent definition of
taxable capital income using microdata available for
2001-2008
2. We impute capital income for 2009-2010 to extend the
consistent series when only tabulated tax statistics are
available
Thereby, we can reassess to which extent
- income concentration increased in Germany between 2001
and 2010.
- the recession in 2009 hit the very top of the income
distribution.

10. 9/35
Outline
Uncorrected Top Income Shares, 2001-2010
Consistent Top Income Shares, 2001-2008
Imputation of Dividend and Interest Income, 2009-2010
Open questions
Conclusion

11. 10/35
Outline
Uncorrected Top Income Shares, 2001-2010
Consistent Top Income Shares, 2001-2008
Imputation of Dividend and Interest Income, 2009-2010
Open questions
Conclusion

12. 11/35
Computing Top Income Shares
PIT statistics tabulated data (more frequently available)
1. Use Pareto interpolation to assess Pareto parameter a and
income threshold of top x%
2. Income share of top x%=
a
(a − 1)
·income threshold of richest x%·
x% of total tax units
total income
PIT microdata (2001-2008; other: 1992,1995,1998)
1. Assess income threshold of top x% directly from microdata
2. Income share of top x%=
income aggregate of richest x%
total income

13. 12/35
Uncorrected Share of Top 1%
9
10
11
12
13
14
Incomeshare(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Own calculations, PIT statistics (tabulated data)

14. 12/35
Uncorrected Share of Top 1%
+4.0%
9
10
11
12
13
14
Incomeshare(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Own calculations, PIT statistics (tabulated data)

15. 13/35
Outline
Uncorrected Top Income Shares, 2001-2010
Consistent Top Income Shares, 2001-2008
Imputation of Dividend and Interest Income, 2009-2010
Open questions
Conclusion

16. 14/35
Three Consistent Series
Series 1: 100%-rule (governing law until 2001/2)
100% gross dividends are taxable, corporation tax=tax credit
Series 2: 50%-rule (governing law 2001/2-2008)
50% of (gross dividend - corporation tax) is taxable Details
→ 37.5% dividend income visible in PIT statistics,
but 100% dividend income can be reconstructed in PIT
microdata.
Series 3: 0%-rule (governing law since 2009)
Introduction of dual income tax: dividends and interest
income subject to a new withholding tax
→ both not visible anymore neither in PIT statistics nor in PIT
microdata

17. 15/35
Three Consistent Series: Top 1%
9
10
11
12
13
14
Incomeshare(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
100%-rule 50%-rule 0%-rule
Source: Own calculations, PIT microdata and statistics (2009/10)

18. 15/35
Three Consistent Series: Top 1%
9
10
11
12
13
14
Incomeshare(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
100%-rule 50%-rule 0%-rule Uncorrected
Source: Own calculations, PIT microdata

19. 16/35
Outline
Uncorrected Top Income Shares, 2001-2010
Consistent Top Income Shares, 2001-2008
Imputation of Dividend and Interest Income, 2009-2010
Open questions
Conclusion

20. 17/35
Imputation of Dividend and Interest Income
Introduction of dual income tax in 2009:
Dividend and interest income subject to flat withholding tax
→ not visible in and not linkable to income tax data
Find proxy for both aggregate dividend and interest
income and assign to top fractiles
Extend consistent series to 2010

21. 18/35
Potential Proxies for Capital Income
1. National accounts
+ not linked to tax law
- dividends from corporations and partnerships
2. Tax flow aggregate
+ tax base can be obtained inverting tax flows by tax rate
- depends on tax law (e.g., saver’s allowance etc.)
- dividends from corporations and interest income received
by corporations, partnerships and private households
3. Survey data such as SOEP
+ not linked to tax law
- do not cover the top of the income distribution
4. Lagged GDP
+ indicator for economic development in general
5. German stock index CDAX
+ indicator for dividend development in general
- not necessarily reflects German taxpayers’ dividends

22. 19/35
Dividend Proxies, 2001-2013
40
60
80
100
120
140
160
Dividendincome(realindex)
2002
2004
2006
2008
2010
2012
National accounts Tax flow aggregate PIT microdata
Stock market Lagged GDP

23. 20/35
Correlation with PIT Dividends, 2001-2008
DIVFRACTILE DIVNA DIVTF DIVCDAX GDPLAG CAPSOEP
<P90 59.2 71.4 86.6 56.7 47.5
P90–95 77.2 53.9 94.2 69.9 41.2
P95–99 66.3 65.0 93.4 70.1 43.9
P99–99.5 63.8 64.4 94.6 76.5 42.8
P99.5–99.9 66.4 58.0 94.9 82.9 38.9
P99.9–99.99 68.2 56.0 91.9 80.2 36.2
Top 0.01% 66.4 47.4 82.7 75.8 17.3

24. 21/35
Interest Income Proxies, 2001-2013
40
60
80
100
120
140
160
Interestincome(realindex)
2002
2004
2006
2008
2010
2012
National accounts Tax flow aggregate
PIT microdata Lagged GDP

25. 22/35
Correlation with PIT Interest Income, 2001-2008
INTFRACTILE INTNA INTTF GDP GDPLAG CAPSOEP
<P90 60.3 98.6 72.8 77.5 53.6
P90-95 39.9 97.2 85.4 88.4 44.8
P95-99 50.8 97.6 79.5 80.2 49.3
P99-99.5 66.9 92.2 62.3 61.8 48.9
P99.5-99.9 72.2 84.6 52.1 47.2 49.7
P99.9-99.99 71.8 80.6 50.0 40.7 48.3
Top 0.01% 17.2 48.5 36.3 32.2 68.9

26. 23/35
Composite Capital Income Proxies
P99-99.5; 2009-2013
1500
2000
2500
3000
3500
CapitalIncomeP99-99.5(mio.Euro)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0108
CAP P99-99.5 extrapolations: TF, CDAX
NA, CDAX TF, TF NA, TF
TF, NA NA, NA SOEP
lagged GDP

27. 24/35
Corrected Top Income Shares, 2009-2010
share of top x% ≈
uncorrected share (1) · sorting effect (2) + proxy (3)
(1) uncorrected share from PIT statistics (tabulated data)
(2) sorting effect for each top x% (2001-2008 average) =
1
T
T=8
t=1
0%-rule share sorted by 100%-rule incomet
0%-rule share sorted by 0%-rule incomet
(3) proxy distributed over fractiles (2001-2008 average) =
1
T
T=8
t=1
top x% capital incomet
fractile’s average capital income
·
proxy2009,2010
1
T
T=8
t=1 proxyt
proxy index
· 1
income total2009,2010

28. 25/35
Corrected Share of Top 10%, 2001-2010
+10%
+4.8%
34
35
36
37
38
39
40
Incomeshare(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Corrected Uncorrected
Source: Own calculations, PIT microdata and statistics

29. 26/35
Corrected Share of Top 1%, 2001-2010
+14.6%
+4%
9
10
11
12
13
14
Incomeshare(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Corrected Uncorrected
Source: Own calculations, PIT microdata and statistics

30. 27/35
Corrected Share of Top 0.01%, 2001-2010
+15.7%
+2.6%
1
1.5
2
2.5
3
Incomeshare(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Corrected Uncorrected
Source: Own calculations, PIT microdata and statistics

31. 28/35
Excursion: Recession in Germany 2009
45
46
47
48
49
50
51Inequalitycoefficient(%)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: Inequality of equivalent gross household income
Source: Own calculations, SOEP

32. 29/35
Outline
Uncorrected Top Income Shares, 2001-2010
Consistent Top Income Shares, 2001-2008
Imputation of Dividend and Interest Income, 2009-2010
Open questions
Conclusion

33. 30/35
Income shifting towards corporations?
98
100
102
104
106
108
Numberofbusinesses(2008=100)
2008 2009 2010 2011 2012
sole proprietorships corporations partnerships
Source: Statistical Office, business register (Unternehmensregister)

34. 31/35
Retained earnings in corporate sector?
-200
-100
0
100
200
Netlending/netborrowing(bnEuro)
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Private households Corporations
Government Rest of the world
Source: Statistical Office, national accounts

35. 32/35
Outline
Uncorrected Top Income Shares, 2001-2010
Consistent Top Income Shares, 2001-2008
Imputation of Dividend and Interest Income, 2009-2010
Open questions
Conclusion

36. 33/35
Again: L-countries according to Piketty (2014)
0
5
10
15
20
25
Incomeshare(%)
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Germany Sweden Japan
Income share of top 1%
Source: World Top Incomes Database, Germany 2001-2010 from Piketty (2014)

37. 34/35
Germany still a L-country?
0
5
10
15
20
25
Incomeshare(%)
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Germany Sweden Japan United States
Income share of top 1%
Source: World Top Incomes Database, own calculations

38. 35/35
Conclusion
Our consistent top income series for Germany 2001-2010
shows a much larger increase in income concentration
than previous series.
The recession in 2009 hit the very top of the income
distribution, but probably only temporarily.
The flat tax on capital income since 2009 will foster income
concentration at the top in the future.
However, this will be visible only partly in income tax data.
→ correction methods → interpret trends with caution →
cross-check with other data sources like HFCS

39. 36/35
50% rule for dividends
Back

40. 37/35
Tabulated data Germany 2010
back
beträgt bei der festgesetzten Einkommensteuer 0,706 und liegt damit deutlich über dem beim
GdE gemessenen Wert von 0,461. Die ungleiche Verteilung der Steuerlast ist durch den progres-
siven Verlauf des Steuertarifs begründet.
Tabelle 3: Einkommensteuerpflichtige 2010 nach dem Gesamtbetrag der Einkünfte
Stpfl. % 1 000 € % Stpfl. % 1 000 € %
< - 500 000 1 127 0,4 -1 920 552 36,5 - -
- 500 000 - - 250 000 1 468 0,5 - 505 747 9,6 - -
- 250 000 - - 125 000 2 866 1,0 - 497 485 9,5 - -
- 125 000 - - 50 000 8 603 3,1 - 653 052 12,4 - -
- 50 000 - - 25 000 14 339 5,2 - 496 442 9,4 - -
- 25 000 - 0 247 493 89,7 -1 186 535 22,6 - -
zusammen 275 896 100 -5 259 813 100 - -
0 - 2 500 845 468 3,2 696 275 0,1 25 377 0,1 63 478 0,0
2 500 - 5 000 582 532 2,2 2 197 027 0,2 48 264 0,2 31 995 0,0
5 000 - 7 500 722 649 2,7 4 541 188 0,4 76 079 0,4 43 023 0,0
7 500 - 10 000 972 044 3,7 8 566 816 0,8 176 084 0,8 72 620 0,0
10 000 - 12 500 1 298 840 4,9 14 632 591 1,3 680 453 3,2 206 079 0,1
12 500 - 15 000 1 290 140 4,9 17 719 818 1,6 878 058 4,1 503 532 0,3
15 000 - 20 000 2 471 102 9,4 43 206 854 3,9 1 793 986 8,4 2 232 057 1,2
20 000 - 25 000 2 482 336 9,4 55 831 621 5,1 2 136 206 10,0 4 007 154 2,1
25 000 - 30 000 2 439 050 9,2 67 028 003 6,1 2 350 177 11,0 6 100 062 3,3
30 000 - 37 500 3 155 047 11,9 106 009 181 9,6 3 117 919 14,6 11 763 235 6,3
Verlustfälle (Gesamtbetrag der Einkünfte < 0 € )
Gewinnfälle (Gesamtbetrag der Einkünfte ≥ 0 € )
Gesamtbetrag der Einkünfte
von … bis unter … €
Gesamtbetrag der
Einkünfte
Festgesetzte Einkommensteuer
- 25 000 - 0 247 493 89,7 -1 186 535 22,6 - -
zusammen 275 896 100 -5 259 813 100 - -
0 - 2 500 845 468 3,2 696 275 0,1 25 377 0,1 63 478 0,0
2 500 - 5 000 582 532 2,2 2 197 027 0,2 48 264 0,2 31 995 0,0
5 000 - 7 500 722 649 2,7 4 541 188 0,4 76 079 0,4 43 023 0,0
7 500 - 10 000 972 044 3,7 8 566 816 0,8 176 084 0,8 72 620 0,0
10 000 - 12 500 1 298 840 4,9 14 632 591 1,3 680 453 3,2 206 079 0,1
12 500 - 15 000 1 290 140 4,9 17 719 818 1,6 878 058 4,1 503 532 0,3
15 000 - 20 000 2 471 102 9,4 43 206 854 3,9 1 793 986 8,4 2 232 057 1,2
20 000 - 25 000 2 482 336 9,4 55 831 621 5,1 2 136 206 10,0 4 007 154 2,1
25 000 - 30 000 2 439 050 9,2 67 028 003 6,1 2 350 177 11,0 6 100 062 3,3
30 000 - 37 500 3 155 047 11,9 106 009 181 9,6 3 117 919 14,6 11 763 235 6,3
37 500 - 50 000 3 676 976 13,9 158 998 127 14,4 3 659 554 17,1 21 424 496 11,4
50 000 - 75 000 3 638 457 13,8 220 258 865 20,0 3 628 756 17,0 36 399 615 19,4
75 000 - 100 000 1 416 853 5,4 121 314 902 11,0 1 413 349 6,6 24 254 614 12,9
100 000 - 125 000 590 847 2,2 65 471 156 5,9 589 104 2,8 14 977 938 8,0
125 000 - 175 000 435 332 1,6 63 168 196 5,7 433 545 2,0 16 546 893 8,8
175 000 - 250 000 206 186 0,8 42 379 646 3,8 204 969 1,0 12 549 445 6,7
250 000 - 375 000 102 960 0,4 30 818 652 2,8 102 107 0,5 9 935 408 5,3
375 000 - 500 000 35 238 0,1 15 100 367 1,4 34 879 0,2 5 103 953 2,7
500 000 - 1 000 000 34 243 0,1 22 842 890 2,1 33 788 0,2 7 965 146 4,3
1 000 000 - 2 500 000 11 025 0,0 16 100 077 1,5 10 835 0,1 5 521 704 2,9
2 500 000 - 5 000 000 2 230 0,0 7 564 253 0,7 2 221 0,0 2 494 523 1,3
5 000 000 1 314 0,0 17 386 712 1,6 1 307 0,0 5 188 878 2,8
zusammen 26 410 869 100 1 101 833 215 100 21 397 017 100 187 385 847 100
insgesamt 26 686 765 1 096 573 402 21 397 017 187 385 847
Gewinnfälle (Gesamtbetrag der Einkünfte ≥ 0 € )
oder mehr
Die ungleiche Verteilung der Einkommen und der Steuerlast wird nochmals in Tabelle 4 deutlich,
die im Gegensatz zu Tabelle 3 die „höchsten“ negativen Einkünfte und die „höchsten“ positiven
Source: Annual PIT Statistics (jährliche Einkommensteuerstatistik), Destatis

41. 38/35
Income Composition within Top Fractiles, 2007
0
10
20
30
40
50
60
70
80
90
100
Shareoftotalincome(%)
<P90
P90-95
P95-99
P99-99.5
P99.5-99.9
P99.9-99.99
Top
0.01
Business Wages Capital
2007
Source: Own calculations, FAST

42. 39/35
Control total for population, 1998-2010
Total tax units Total recorded
in 1000 in tax statistics
Year in 1000
1998 45,155 28,293
2001 46,802 27,413
2002 47,584 27,294
2003 47,927 26,647
2004 46,338 26,154
2005 48,574 26,264
2006 47,942 25,934
2007 48,297 26,327
2008 48,578 26,128
2009 48,823 26,062
2010 49,192 26,411
Total recorded in tax statistics refers to income and payroll taxpayers in 1998 and to
only income tax payers from 2001 to 2010. Statistical yearbooks, various years, PIT
statistics, own calculations.

43. 40/35
Control total for income
The income total is based on the national accounts published in
Fachserie 18 Reihe 1.5 Volkswirtschaftliche
Gesamtrechnungen. Inlandsproduktberechnung, Lange Reihen
ab 1970, Stand März 2014. Total household income is the sum
of
Compensation of employees (Residents)
(Arbeitnehmerentgelt (Inländer)) (Table 1.3)
+ Operation surplus (Betriebsüberschuss) (Table 1.10)
+ Income of self-employed (Selbständigeneinkommen)
(Table 1.10)
+ Property income (Vermögenseinkommen) (Table 1.10)
- Employers’ actual social contributions (Sozialbeiträge der
Arbeitgeber) (Table 1.8).
= Total household income

44. 41/35
Control total for income, 1998-2010
Total Total
household income income recorded Control total
Year in tax statistics
(bio. Euro) (mio. Euro) (mio. Euro)
1998 1,263.7 902,992 1,137,294
2001 1,354.0 963,858 1,218,627
2002 1,356.7 959,635 1,221,003
2003 1,375.3 939,915 1,237,761
2004 1,391.8 953,835 1,252,638
2005 1,423.9 996,304 1,281,483
2006 1,477.9 1,013,694 1,330,092
2007 1,528.1 1,067,377 1,375,326
2008 1,586.8 1,099,228 1,428,129
2009 1,544.4 1,061,489 1,389,969
2010 1,587.2 1,101,833 1,428,453
Values are in current Euro. Total income recorded in PIT statistics refers to income and
payroll tax in 1998 and to only income tax from 2001 to 2010.